What is the monetary unit assumption?

Definition of Monetary Unit Assumption

The monetary unit assumption as it applies to a U.S. corporation is that the U.S.dollar (USD) is stable in the long run. That is the USD does not lose its purchasing power. Note that this is the assumption.

As a result of the monetary assumption, accountants at a U.S. corporation do not hesitate to add the cost of a parcel of land purchased in 2019 to the cost of another parcel of land that had been purchased in 1970. (See example below.)

Another part of the monetary unit assumption is that U.S. accountants report a corporation's assets in dollar amounts (rather than reporting details of all of the assets). If an asset cannot be expressed as a dollar amount, it cannot be entered in a general ledger account. For example, the management team of a very successful corporation may be the corporation's most valuable asset. However, the accountant is not able to objectively convert those talented people into USDs. Hence, the management team will not be included in the reported amounts on the balance sheet.

Example of Monetary Unit Assumption

Let's illustrate the monetary unit assumption with the following hypothetical example. A U.S. corporation purchased a two-acre parcel of land at a cost of $40,000 in 1970. Then in 2019 the corporation purchased an adjacent (nearly identical) two-acre parcel at a cost of $500,000. After the 2019 purchase is recorded, the balance in the corporation's general ledger account Land is $540,000. Therefore, the corporation's balance sheet will report its four acres of land at a cost of $540,000. There is no adjustment for the vast difference in purchasing power between the 1970 dollar and the 2019 dollar.